Many entrepreneurs are focused on creating more natural gas demand thanks to the abundant supply now being produced in the Lower 48. Converging along the Texas Gulf Coast are plans for massive new projects that will export that gas as LNG, sourced from the nearby Eagle Ford and Haynesville shale plays, eventually from the Permian Basin, the Marcellus and Utica shales, and maybe even points beyond.

Vivek Chandra is CEO and one of the founders of a small company with such dreams, Texas LNG LLC, which in June received DOE approval to export up to 100 Bcf of gas annually. It proposes to build a liquefaction plant with two trains at the port of Brownsville, Texas, near the Mexican border. This is the deepest-water U.S. port that is situated closest to the Panama Canal, which will play a huge role in North American LNG shipping.

From an estimated start date of 2019, Texas LNG proposes to export 2 million tonnes per annum (mtpa) of LNG. Its partner is South Korea’s Samsung Engineering, which is expecting to complete the FEED phase (front-end engineering and design) in second-half 2015.

Chandra’s background includes degrees from the Colorado School of Mines, the University of Pennsylvania, the French Petroleum Institute, and Deakin University in Australia. During a career that includes stints at ARCO, Schlumberger, Dubai Energy, and an Australian energy company, he’s worked on LNG and gas pipeline projects around the world, as have his partners. He has also authored a best-selling book on the international natural gas industry.

His hypothesis is that the engineering, construction and operation of liquefaction trains and export facilities should be “Lego-ized” and made repeatable, thereby becoming less expensive than the massive one-off LNG projects of most major companies, which often incur delays or go over budget. Investor caught up with him for more details after he spoke at Hart Energy’s North American LNG Exports Conference in Houston in November.

Vivek Chandra

Investor: Why do you think such a small company as Texas LNG could develop an LNG export facility?

Chandra: This goes back to having been in the LNG business for 20 years. I’ve watched how the commercial relationships have been skewed to the sellers of LNG. Sellers to me are an oligopoly: They find a gas field or buy it, develop it, and sell the gas to buyers on very rigid fiscal terms where the LNG is sold at prices linked to oil. However, the link between oil and gas prices should have been broken long ago, ever since consumers, especially power utilities, stopped constructing dual-fired power stations that could run either oil or gas.

In the early days of the LNG industry, there was no consensus on what to base LNG prices on—however, global oil prices were known and rising. At the time, it may have made sense to link the commodities. It makes no sense today where LNG buyers, predominately power and gas utilities, have reason to link to oil markets. However, the small group of LNG sellers who manage the markets have kept this link for their own benefit. Texas LNG, as well as other U.S. LNG projects, will make a small change in the status quo.

Investor: How do you see the LNG market, then?

Chandra: Something fundamental has changed. The U.S. shale gas revolution—this is the first time we’ve had so many new gas supplies not controlled by the oligarchs [the majors], but instead by the independents. This didn’t bother the majors when it was all about buying and selling natural gas just in North America, a closed market, but now, we’re talking about sending gas all over the world, threatening the controlled LNG markets that have benefited the oligarchs for the past few decades.

Another argument promoted by the oligarchs is the “security of supply” mantra. Consumers were warned that any change in commercial terms would threaten the supply of LNG to the markets, especially Japan and Korea. What the sellers didn’t count on was the earthquake in Japan. This tragic, and completely unforeseen, event forced sellers to scramble to get more gas—and to the surprise of all, the lights stayed on in Tokyo as new players, especially traders and resellers, traded LNG cargoes and managed to get supply to Japan. So the system worked, proving once and for all that LNG is becoming a global commodity and security of supply now rings hollow.

This chink in the armor of the oligarchs has paved the road for companies like Cheniere Energy and Texas LNG to break into the market. We’ve found there is enough interest in the market for our flexible and transparent terms.

The eureka moment was when, a few years ago, Cheniere published its LNG sales contract terms. For a market based on nontransparency and secrecy, this was truly a watershed moment. Now the world had officially changed.

Investor: So how did you originate your plan for Texas LNG?

Chandra: In the middle of last year my partners and I started looking at the opportunities. I had previously developed a success index that identified key common factors for successful projects. We basically will reverse-engineer successful projects, incorporating as many of these success factors as possible. It is like finding someone who makes good chocolate chip cookies. We will basically identify the ingredients and make our own cookies.

Investor: Why Brownsville?

Chandra: We decided that building a greenfield project on the Pacific or Atlantic coasts would be too difficult. We called on a lot of ports on the Gulf Coast, and the Port of Brownsville was the most responsive and supportive. Late last year, we secured an option for deepwater acreage on the Brownsville ship channel, and we submitted our DOE permit application on December 31, 2013. We received the FTA export permit in mid-2014, and are now planning on the FERC process.

Investor: What kind of experiences inform your management of this project?

Chandra: One lesson we got from working on LNG in Australia is that you want to maximize use of local construction skills but make sure we do not face skilled labor shortages.

As LNG markets develop, the projects with the lowest cost will be most competitive. We are running a low-cost and smart operation in order to be able to compete on global prices. This is very much a project where we are using our own wits.

Investor: How did Samsung become involved?

Chandra: We went around the world and talked to 11 different engineering companies, but there was a lack of thinking outside the box with these traditional engineering companies. It was astounding—everybody was repeating the same playbook and did not or could not think of creative partnership solutions. To its credit, Samsung Engineering was willing to think differently. Our COO, Langtry Meyer, had worked at Samsung headquarters for eight years, so that obviously helped us get in the front door. They are keen to take a leading engineering, procurement and construction role in an LNG project and have a minority interest in our project.

Investor: What is Samsung’s role?

Chandra: They have completed 15,000 man-hours of conceptual design and pre-FEED. In November, we kicked off the FEED studies with more than 80 full-time engineers. Samsung is expected to be our EPC contractor for the project.

Investor: What about funding? These LNG facilities cost billions of dollars to build.

Chandra: A few weeks ago, we announced that Third Point LLC, a New York-based fund with more than $17 billion in assets, will take an equity interest in the project. Its investment will provide the development capital we require for completing the permitting processes and bringing the project to FID [final investment decision]. Until the investment by Third Point, we were completely self-funded.

We are now also commencing the LNG marketing process. We decided, early on, we’re not going to go to the market until we have a project that is well-defined, both technically and commercially. We still find people in this business who haven’t realized how the world has changed. They say to us, “You’re not Shell. You don’t have a major player behind you. How will you build this project?” Fortunately, there are those who see the change coming. We have identified some interested offtakers and expect to progress commercial negotiations over the next few months.

Investor: What other challenges have you faced? What about LNG buyers?

Chandra: Customers with a traditional approach would continue to deal with large oil companies who generally offer higher prices and more rigid terms. We want to talk to those customers who are willing to think differently. The world is changing, and when there is rapid change, there are always those who try to hang on to the old way of doing business—but the ones who embrace change will benefit in the long run. We want to talk to those customers. Sooner rather than later, LNG is going to become a globally traded commodity with a robust market like crude oil.

Investor: What makes you believe Texas LNG can compete with the majors?

Chandra: LNG technology is actually quite simple and available from third-party suppliers, and it has not really changed in 40 years. Project delivery is the key. In fact, our chief technology officer, Mike Maloney, has been delivering large oil and gas projects around the world for more than 40 years. We believe we can compete with the majors on this—look at their own track record. How many large projects have they delivered on-time and on-budget? Not many, in my view. Majors have a big balance sheet allowing them to hide many of their errors.

We want to convince people that this is not only a game the majors can play. We want to be a constructive disrupter. There is room for emerging players like ourselves in LNG markets.

I was at an industry conference in Tokyo recently organized by Japan’s Ministry of Energy, and all the big shots were there. The buyers were all asking for change and more flexible contracts with no destination clauses [the ability to buy and resell LNG cargoes] not linked to oil prices. The majors did not really want to respond to their request. If you have an Exxon selling oil-indexed, rigid commercial-termed LNG from Qatar, how do you sell LNG from Texas indexed to natural gas? This is the dilemma for them.

This is the perfect storm for the oligarchs: We have new supply from the U.S., the market has opened up and demands change, lower oil prices mean that expensive LNG projects will struggle to compete, and the U.S. government is supportive of LNG exports.

Our 2 mtpa will be a drop in the global market bucket, but at the end of the day, it’s going to be a game-changer.

Who benefits? The global gas consumer, as they will benefit from pricing transparency and gas-on-gas competition. I give Cheniere lots of credit, hats off, for blazing the trail. But if we can push to even more transparency, all the better. It’s all about giving the best LNG price and terms to the customer.

Investor: Where do you expect to get your gas supply?

Chandra: We are a pure tolling facility, so we will not own the supply gas. We have an agreement with a marketer I don’t want to name just now. We’re happy to make introductions to facilitate discussions between LNG offtakers and feed-gas suppliers, but once the buyer and seller are negotiating terms, we don’t want to be in the room. Our business model is very clear and simple—we get paid to process feed gas into LNG. We believe that in a commodity business, each part of the value chain should have clear pricing and terms.

We will keep our costs as low as possible by developing a generic LNG plant, with a bespoke front-end gas treatment plant to process local gas. We want Samsung to design a faciilty that we can order again for another location. It’s about dropping the barriers to entry and the costs.

At the end of the day, we’re trying to make LNG like other commodities to the benefit of our customers. It is very exciting—who knows what the future is going to look like?